Is There a Bubble in the Agriculture Economy?

At the Graduate School of Banking at LSU, I co-lecture with Tom Payne of University of Tennessee – Martin on the topic of “Interpreting Economic Change.” Payne discussed the reasons for the recent bubbles in the economy. While he was lecturing, I was pondering whether a similar bubble has occurred or will occur in the agricultural industry.

The bubble in the general economy was created by a combination of factors, both political and economic.

• First was the overturn of the Glass-Steagall Act, which separated commercial and investment banking. This, in turn, created shadow investment banks that “kicked the can” forward concerning risk, i.e. selling of loans in the U.S. and abroad.
• Second was the inflow of foreign money, which artificially kept interest rates low encouraging leverage.
• The third factor was political and regulatory policy encouraging home ownership. This enabled and encouraged people to purchase houses and build commercial buildings that they could not afford or justify in the marketplace. The result was decline in the value of real estate by 52% in Las Vegas, and over 40% in Los Angeles, San Francisco and Miami.

Is there a bubble in North American agriculture? Perhaps it is confined to the grain segment, depending on emerging-market-countries’ demand, and rural areas with large amounts of oil, minerals and water availability and rights. Asset values in these areas have increased due to growth in worldwide emerging markets and the alternative energy industry. A slowdown or shift in course in either area may result in a correction, but a small probability of a crash.

P.S.
Banking and lending school attendees have been concerned that aggressive growth and expansion in the livestock industry and somewhat in grains, land in transition to non-agricultural uses, as well as cyclical downturns in the livestock industry, are the frontlines of the current problem loans.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.